Following the money: understanding capital movement through trade misinvoicing in Africa – Fellows’ seminar by Arcade Ndoricimpa

1 March 2021

“The phenomenon of capital flight has become an issue of increasing concern over the past decades because of the scourge it inflicts upon poverty alleviation efforts in developing countries,” said STIAS Iso Lomso fellow Arcade Ndoricimpa of the Faculty of Economics and Management at the University of Burundi. “Financial resources lost due to trade misinvoicing have huge implications, hindering development efforts in Africa.”

STIAS Iso Lomso Fellow Arcade Ndoricimpa presented his webinar on 25 February 2021

“An estimated $1.4 trillion left the continent between 1970 and 2015 through capital flight. Africa is a net creditor to the rest of the world since the stock of capital flight is greater than the stock of external debt. A small fraction of the capital that fled could pay off external debt. Africa loses more in capital flight than it gains in aid and investment. The phenomenon of capital flight is a paradox, with capital flowing in the wrong direction – from capital-scarce to capital-abundant economies.”

“It’s an area of particular research interest to me because of what it entails for development in Africa,” he added. “Our commitments to poverty alleviation and sustainable development, specifically achievement of the Sustainable Development Goals, are increasingly undermined by illicit financial flows.”

He explained that capital flight is about outflows of financial resources not recorded in the official government statistics and that trade misinvoicing is an important channel – a technique to move resources illicitly across borders by falsifying the value or volume of exports and imports which also leads to major loses in tax revenues.

Ndoricimpa’s project aims to generate evidence to better understand trade misinvoicing and identify ways to tackle the problem. Using trade data from the United Nation’s COMTRADE, and the International Monetary Fund’s Direction of Trade Statistics (DOTS) databases, the study estimates trade misinvoicing in Africa at a disaggregated level, by major trading partners and by major export and import commodities. Potential loss of tax revenues due to trade misinvoicing are computed, and factors determining trade misinvoicing in Africa are also examined.

The study is examining the magnitude, trend and patterns of capital flight through trade misinvoicing in Africa over the period 1970 to 2019 in 52 African countries. Ndoricimpa hopes it will shed light on which trading partners are involved, the commodities most affected, and the factors affecting the phenomenon.

His work thus far has found both extensive under- and over-invoicing examples from across the 52 countries accounting for huge capital movement.

“39 of the 52 countries were under-invoicing their exports to advanced economies, the rest over-invoicing,” he said. “27 out of 52 showed a net outflow of resources through trade misinvoicing.”

“As one example, South Africa showed major under-invoicing in trade with China – close to $200 billion over the period 1998 to 2019,” he added.

The study is also showing that there are major loses of tax revenues through trade misinvoicing, with a number of tax types affected in the process, including VAT, corporate income tax, and customs duties. Because tax regimes across the continent are varied and complex, the study acknowledges that accurate assessments are difficult to make. Using estimates of trade misinvoicing and applicable tax rates, the study estimated potential tax losses through trade misinvoicing.

“Again looking at the example of South Africa, tax revenue loss through trade misinvoicing is estimated to be equal to 2.4% of GDP on average, over the period 2000 to 2019. How many hospitals, schools, etc. could have been built? Tax evasion through trade misinvoicing hampers efforts for domestic resource mobilisation to finance the Sustainable Development Goals (SDGs). According to IMF, on average, sub-Saharan African countries will need additional resources amounting to 15.4% of GDP to finance the SDGs in education, health, roads, electricity and water by 2030.”

No small fry

And it’s not small operators. Ndoricimpa pointed to the major role played by multinational corporations (MNCs).

“80% of overall global trade is linked to MNCs. In terms of exporting, African countries mainly rely on primary commodities especially natural resources,” he explained. “Due to the capital-intensive nature of these activities it is usually MNCs that run extractive and mining activities. Through trade misinvoicing, these end up taking resources that should be used to develop the continent.”

He gave the example of the Acacia Mining Company which came in to dispute with the Tanzanian government in 2017. The government contended that the company was not paying enough tax and therefore banned the export of unprocessed minerals and established a commission to investigate the content of containers. “They found they contained twice as much copper and silver, and eight times as much gold than was declared,” he said. “Acacia had to pay the government $300 million and agree to a future 50:50 sharing.”

From his work thus far, Ndoricimpa described some of the major factors that feed into these activities as financial motives of exporters and importers, capital controls, openness to trade, political instability and lack of control of corruption.

“Among other things, there is a need to liberalise the capital account and there is a very strong need for better governance,” he said.

Going forward he will focus specifically on misinvoicing related to the trade of Africa with China, the mining and oil sectors as well as major imports like oil, pharmaceuticals and vehicles.

He acknowledged that this is a global problem related mainly to developing countries and that it’s a complex and difficult problem for national governments to deal with requiring the involvement of regional and international bodies like the World Trade Organisation.

“Governments do know about it but we have to question who benefits from it and who will lose by stopping it – there are corrupt government officials, bribery and personal interests at stake.”

“Policy makers must step up their efforts to prevent this. Reducing it will require collaboration between governments. There is a need for governments to sit and negotiate a way out while fully understanding the extent of the problem and the shared benefits. I hope the research creates awareness and encourages a willingness to reduce this scourge which jeopardises development.”

Michelle Galloway: Part-time media officer at STIAS
Photograph: Anton Jordaan


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